Calculate Leave Salary
Before heading to the calculation of leave salary lets jump toward the meaning & concept of leave salary, what does leave salary means& how to utilize the same?
In every organization paid leaves, and casual leaves are granted to employees to manage their work-life balance which is a major concern in todays corporate world, hence to take care of the employees & their interests, organizations provide a handsome number of leaves to the employee.
Now it is not necessary that all the employees of the organization avail the whole leaves provided to them so leaves that have not been availed by the employees & accumulated to their account, to utilize the accumulated leaves employees have two options, either to avail it together or encash those leaves. If left standing to the employees credit is not taken within a year, as per the service rules it may lapse or it may be encashed or it may be accumulated.
The employee may avail the accumulated leaves standing to the credit of an employee during his service time or, subject to service rules, such leaves may be encashed at the time of retirement or leaving the job. Encashment of leave by surrendering leave standing to ones credit is known as leave salary.
Taxation of leave salary or leave encashment under Section 10(10AA) of income Tax Act, 1961:
Taxation on leave salary depends upon two situations whether it has been encashed before retirement (during service period) or after retirement (after service period). If the leave is encashed before retirement, then it is fully taxable in the hands of employees, whether government or non-government employees (employees can claim relief under section 89).
However, on the other hand, if the leaves are encashed after retirement, then it will again lead to two situations i.e., whether the employee is a government employee or non- government employee if the employee is a government employee, then the whole amount of leave encashment would be exempt in the employees hand. On the other hand, if the employee is a non-government employee, then a lower of the following encashment amount will be exempt:
I) Actual Amount Received
II) 300000
III) 10 Months Average salary
IV) (30 days leave for each completed year less leave taken) * Average salary
Note: Average salary is calculated by taking the average salary for the last 10 months.
Salary includes Basic Salary+ Dearness allowance (DA) + Commission as a percentage of turnover
If an employee receives a leave salary from more than one employer in the same financial year, then the total amount of leave salary exempt from tax cannot exceed INR 3,00,000.
Where leave salary is received in any earlier year from a former employer and again received from another employer in a later year, then the limit of INR 3,00,000 will be reduced by the amount that was exempted earlier.
Employees may use a taxable leave salary calculator to compute their tax on leave encashment received.
Example on Calculation of leave salary in case of employee retirement:
Mr. Porwal retired on 01.06.2022 after 20 years of service and received a leave salary of ` 4,50,000. Other details of his salary income are:
Basic Salary: ` 5,500 p.m. (` 1,000 was increased w.e.f. 1.4.2021)
Dearness Allowance: ` 3,500 p.m. (50% of which is for retirement benefits)
Commission: ` 500 p.m.
Bonus: ` 1,500 p.m.
Leave availed during service: 500 days
He was entitled to 30 days leave every year.
You are required to compute his taxable leave salary assuming:
(a) He is a government employee.
(b) He is a non-government employee.
Solution:
(a) He is a government employee
Leave Salary received at the time of retirement ` 4,50,000
Less: Exemption under section 10(10AA) ` 4,50,000
Taxable Leave salary Nil
(b) He is a non-government employee
Leave Salary received at the time of retirement ` 4,50,000
Less: Exempt under section 10(10AA) [See Note below] ` 24,166.67
Taxable Leave Salary ` 4,25,833.33
Note: Exemption under section 10(10AA) is least of the following:
(i) Leave salary received ` 4,50,000
(ii) Statutory limit ` 3,00,000
(iii) 10 months salary based on average salary of last 10 months
i.e., Salary of last 10 months i.e.,Aug,2021. –May,2022/ 10 months
[10*((5500*10) +(50%*3500*10))]/10 Months =72,500
(iv) Cash equivalent of leave standing at the credit of the employee based on the average salary of the last 10 months (max. 30 days per year of service)
Leave Due = Leave allowed – Leave taken
= (30 days per year × 20 years) – 500 days = 100 days
i.e., [leave due (in days)/30 days * Average salary p.m.]
[100 days/30days *72,500/10] = 24,166.67
